Eurozone blamed by US for world's economic plight

The United States has warned that political disarray in the European Union is
the "single biggest cause" of the unfolding economic crisis that
threatens to plunge the world into a new recession.

Angela Merkel, the German Chancellor whose government is being asked to foot the largest share of the bill, is reeling from her sixth regional election at the hands of a popular backlash against euro bailoutsPhoto: REUTERS/Tobias Schwarz

Finance ministers of the G7 group of industrialised nations have gathered in theFrench city of Marseille this weekend to discuss how to avert a looming global economic catastrophe, as markets continue their relentless plunge and deep divisions tear apart the European Central Bank (ECB).

But instead of the predicted economic debate, it emerged on Saturday that the bad-tempered meeting was dominated by American and British warnings that political failures and broken promises in the euro zone were in danger of triggering a wider crisis.

"Seventy-five per cent of the dark things happening in the world economy are because of the euro zone," said a senior US official after a round of talks ended in the early hours of yesterday morning.

The beautiful surroundings of the 19th century Palais du Pharo, overlooking the old port of Marseille, did nothing to soothe America's growing anger at the euro zone's inability over recent weeks to take the steps needed to prevent a full blown global economic crisis.

"It was the principal cause of the slowdown we had last summer, and it's been a significant cause of the slowdown we've had this summer," said Timothy Geithner, the US Treasury Secretary.

George Osborne, the chancellor, also waded into the discussion, upbraiding the French, German and Italian finance ministers and central bankers for failing "convincingly" to implement measures agreed at an emergency euro summit in July - guaranteeing the size and powers of the eurozone rescue fund, and ensuring that Greece will not be allowed to default.

"What single thing this autumn would do most to reduce uncertainty and restore confidence? I think it is the convincing implementation of the euro zone package," he said yesterday. "But, I suspect, we haven't heard the last word on euro zone governance."

The clashes at G7, which put Britain and the US together on the sideline as members of the European single currency struggle to resolve its internal contradictions, foreshadow an autumn of disarray within the EU. Their parliaments must ratify the plan for the new EU rescue fund, which is unpopular with many voters, especially in the richer countries.

And just when scepticism among its population is at its greatest, there is finally a realisation among eurozone members that the only way to save the single currency may be a dramatic move towards more integrated economic governance.

To underline the growing fears that the single currency is heading for an existential crisis or crash - and as the G7 sat down at the conference table - the news broke on Friday afternoon that Jurgen Stark, one of the EU's most important policymakers, had resigned as the chief economist of the ECB.

Officials described the development as a "bombshell" timed to go off at the "worst possible moment" for French, German and EU attempts to bolster the fraying and tarnished credibility of the euro zone institutions. "There must be some kind of a euro death wish," said one official.

Mr Stark's resignation, ostensibly for unspecified "personal reasons", mirrored the decision of another German, Axel Weber, earlier this year not to run as the favoured candidate to become president of the ECB but instead to step down from his job as Germany's central banker.

Mr Stark's resignation, ending his lifetime's work at the head of the euro, has exposed the deepening rifts within the ECB and the EU over the political direction that European institutions have been forced to take in order to save Europe's single currency.

Like Mr Weber before him, as well as Germany's Bundesbank and central banks in Finland and the Netherlands, Mr Stark is opposed to the ECB's policy of buying euro zone government bonds to help out highly indebted countries like Italy and Spain.

The measure was one of those agreed at an emergency summit in July. But it pushes the EU towards deeper fiscal union as richer euro countries, such as Germany, assume greater responsibility for the finances of highly indebted countries.

Mr Stark, reflecting a hardening bloc of richer countries, is opposed to the move unless it is accompanied by a "quantum leap" in new powers to punish countries that breach EU budget ceilings, by imposing spending cuts.

For the first time in the EU's history, the Netherlands, a founder member of the European project, last week suggested the previously unthinkable: that countries which persistently break euro rules would either be "taken into care" or just expelled, to face economic catastrophe, unless they mended their ways.

Athens failed yet again last week to satisfy the EU and IMF that it was implementing agreed austerity measures, and it was clearly with Greece in mind that Jan Kees de Jager, the Dutch finance minister, said he was in talks with France about a rule change that would allow failed euro states to be expelled. He said he already had German and Finnish support.

"In future, the ultimate sanction can be to force countries to leave the euro," he said on Thursday. "The most important thing is to have stability in the euro zone, not in the number of member states."

Setting the scene for a bitter battle this autumn as the EU discusses tougher sanctions for indebted euro members, southern European countries have reacted angrily to the idea that they could be kicked out to face an uncertain fate.

Joaquin Almunia, the Spanish vice-president of the European commission, accused the Dutch, Germans and Finns of using "fiscal union" as a smokescreen to impose an anti-European order on an EU once driven by ideals of solidarity and a united Europe.

"Those who think that this hypothesis is possible just do not understand our process of integration," he said. "European integration is the only option."

The glow of idealistic European federalism that once surrounded the euro is fading rapidly as the debt crisis has forced countries such as Germany and the Netherlands into an unloved fiscal union with highly indebted southern European nations such as Greece.

"It has become about saving Germany's skin. The EU's idealistic image as a peace project is now overtaken by a much more brutal game of realpolitik, power and survival," said one aide to a senior EU official.

Angela Merkel, the German Chancellor whose government is being asked to foot the largest share of the bill, is reeling from her sixth regional election at the hands of a popular backlash against euro bailouts. Last week she told German MPs that there would be "no taboos" against discussing whatever steps were needed to ensure the survival of the single currency.

Berlin's political establishment still regards the euro as the keystone of a united Europe, as consider it Germany's national destiny to head it.

"The euro is much, much more than a currency," she said. "The euro is the guarantee of a united Europe. If the euro fails, then Europe fails."